We consider some issues relating to the evaluation of price changes. Recall that, in a two-good...

 

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We consider some issues relating to the evaluation of price changes. Recall that, in a two-good setting, a consumer is modeled to maximize the utiity function U(x1, 22) subject to the budget constraint pi1 + P202. In the following, the notion, "better off" is the same as "higher utility" and "worse off" is the same as "lower utility". 5.1 Suppose that both prices increase and the consumer's income increases as well. The consumper's original consumption bundle was, say, (20, 20) and the new consumption bundle is (32, 8). Under what cases does revealed-preference the- ory tell us that the consumer is now worse off? How about being better off? Suppose we have a consumer who tells us that "each year I find that I can no longer afford the things I used to buy last year." Does this tell us the consumer is becoming worse off? Explain. We consider some issues relating to the evaluation of price changes. Recall that, in a two-good setting, a consumer is modeled to maximize the utiity function U(x1, 22) subject to the budget constraint pi1 + P202. In the following, the notion, "better off" is the same as "higher utility" and "worse off" is the same as "lower utility". 5.1 Suppose that both prices increase and the consumer's income increases as well. The consumper's original consumption bundle was, say, (20, 20) and the new consumption bundle is (32, 8). Under what cases does revealed-preference the- ory tell us that the consumer is now worse off? How about being better off? Suppose we have a consumer who tells us that "each year I find that I can no longer afford the things I used to buy last year." Does this tell us the consumer is becoming worse off? Explain.

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Revealed Preference Theory Examines consumer behavior in terms of his preferences for various combin... View the full answer